HM Revenue & Customs v London Clubs Management Ltd

For VAT partial exemption, a proposed special method must give a fair and reasonable, and more accurate, attribution of residual input tax than the existing method. Attribution must reflect the real economic use of the relevant inputs. Physical use may be relevant, but it is not necessarily a sufficient proxy.

The assessment depends on the observable features and commercial reality of the business. Profitability and the commercial driver for expenditure may be important factors, but their weight is fact-sensitive. An appellate court should not displace a specialist tribunal’s properly reached primary findings of fact merely because another view of the evidence is possible.

The respondent operated United Kingdom casinos making both VAT-exempt gaming supplies and taxable supplies, including food, drink, entertainment and venue hire. It sought approval for a floor-space partial exemption special method to attribute residual input tax, replacing its existing turnover-based method.

The First-tier Tribunal allowed the respondent’s appeal against HMRC’s refusal of the proposed method. The Upper Tribunal, constituted by Proudman J, dismissed HMRC’s appeal on 5 October 2010. HMRC appealed to the Court of Appeal on points of law, contending that the tribunal had failed to assess economic reality and had wrongly found the proposed method fairer and more reasonable.

1. Appeal dismissed. Etherton LJ, with whom Pitchford and Ward LJJ agreed, held that the First-tier Tribunal had correctly directed itself on the governing principles under the Sixth Directive 1977/388/EEC, the Value Added Tax Act 1994 and the Value Added Tax Regulations 1995 SI 1995/2518. A proposed special method must reflect the real economic use of residual inputs and be fairer and more reasonable than the existing method.

2. The tribunal had found that the catering activities, though then unprofitable, were businesses in their own right and were not merely ancillary to gaming. That was a primary finding of fact which supported its conclusion that floor space fairly reflected the economic use of the predominantly property-related residual costs. It also justified distinguishing Aspinall’s Club.

3. HMRC could not overturn that finding by asserting that a proper economic analysis would have produced another conclusion. A perversity challenge had not been distinctly raised, the tribunal had considered the management accounts, and its decision had to be read fairly as a whole. Its comparison of the existing and proposed methods was express and disclosed no error of law.

4. The Court rejected the contentions that unallocated space, the non-property-related costs, anomalous outcomes, and an alleged reversal of the burden of proof established legal error. Those matters had been evaluated by the specialist tribunal on the evidence.

5. Etherton LJ added, obiter, that if the catering activity had no realistic prospect of making a profit after the proposed allocation, that would likely be a critical factor favouring the turnover-based method. In that hypothesis, gaming would be the commercial driver of the overheads and a floor-space allocation could fail to reflect economic reality.

• Court of Appeal (Civil Division): HMRC’s appeal was dismissed: [2011] EWCA Civ 1323.
• Upper Tribunal (Tax and Chancery Chamber): Proudman J dismissed HMRC’s appeal from the First-tier Tribunal on 5 October 2010.
• First-tier Tribunal (Tax Chamber): Allowed London Clubs Management Ltd’s appeal against HMRC’s rejection of the proposed floor-space partial exemption special method, in a decision published on 5 August 2009.